I Fought the Law (the IRS) and the Law Won

Perhaps you've read about the legislation to provide an additional $80 billion in funding for the IRS so that it can hire more agents to go after high income and corporate tax avoiders and evaders.  The first-world story you are about to read might not have occurred if I had been able to get in touch with one of those agents.

It is also a story that suggests perhaps, in my phase-out from full-time teaching, I have too much time on my hands.

The story is about a $311.82 issue I've had with the Internal Revenue Service since this past June.  Here is the punch line.  If the IRS penalizes you $311.82, you try to reach a live person via their 800 number.  But you cannot do so because there is no live person available at the other end. You write letters and get computer generated responses.  You contact the Taxpayer Advocate Office, and it declines to advocate for you.  

At that point, your only recourse is judicial and it turns out, as a practical matter, you have none.  Now that is probably an "access to justice" issue that affects millions of other cases - the legal system simply does not accommodate small matters very well.  And, as I just explained to my wife, there is no small claims court in the federal judicial system.  So even though I have cases indicating (if you keep reading, you can judge for yourself), that I have an open-and-shut winner against the IRS, unless I'm prepared to foot $640, more than double the amount at issue, to pursue it, I've reached the end of the line.  Hence, this cri de coeur.

And, to spare those of you who couldn't care less, it all comes after the break.

The story begins last April.  We have a CPA who does our taxes for us.  We are relatively old, so we've saved some money and it's invested in the markets.  2021 was a good year, but the first quarter of 2022 sucked, so the irony was that we had to pay a lot of money in federal income tax in April 2022 for investment gains that had long since disappeared.  (As I said, first world problem, but whatever....)  Our CPA e-filed four documents for which we were going to have write checks - 2021 income tax to the U.S. and Massachusetts and 2022 estimated taxes to the U.S. and Massachusetts.  On April 14, my wife wrote out four consecutive checks.  I put them in four correctly addressed envelopes and stamped them.  I walked down to the U.S. Post Office mailbox on the corner of Richdale Avenue and Walden Street in Cambridge and deposited all the envelopes.

Let's say that the four checks in the check register were numbered as follows:  1552 - Commonwealth of Massachusetts; 1553 - U.S. Treasury; 1554 - U.S. Treasury; 1555 - Commonwealth of Massachusetts.   When I looked at our bank statement two weeks later, I could see that checks 1552, 1554, and 1555 had cleared (including one of the checks to the U.S.).  Check 1553, the big one for 2021 income tax, had not.  

There is an 800 number to call the IRS about questions like this.  I tried it on several occasions.  One goes through a whole series of prompts before getting the following message and a hang-up: "We are sorry but due to volume we cannot take your call now."  I tried looking at my account in the IRS's online system and found that it was only current as of the end of 2020.

Now I felt like I was between a rock and a hard place.  I called our CPA. He told me the IRS was extremely slow because of COVID and its lack of staff.  The IRS website itself has a form for getting reimbursement for stopped check fees because it is so likely to have lost it.  But I didn't want to stop the check and pay again on the likely chance that the IRS was just ... slow ... and was ready to cash the check.

So I waited.

On June 6, the IRS issued us a CP14 notice for the unpaid taxes (i.e., the amount of check 1553), a late penalty of $311.82, and interest of $178.19.  I immediately stopped payment on the check, and paid via an electronic bank transfer the amount of check 1553.  I declined to pay the penalty and interest.  I looked up on the IRS website how to dispute a penalty.  It said that to dispute a penalty one should call the toll-free number in the upper-right hand corner of the notice.  The only problem was that the CP14 notice had no toll-free number.  And I called the general toll-free number (see above), which resulted in the same "sorry, too much volume" hang-up.  

Hence, on June 13, I wrote a long letter to the IRS office in New York that issued the notice (this time sending it certified mail).  It laid out all the facts and requested cancellation of the penalty and interest.  

There was no response until mid-August when I got a computerized form letter from somebody in the Memphis, Tennessee office of the IRS, acknowledging receipt of the June 13 letter, completely ignoring what it said, and stating that I now owed the penalty of $311.82 plus additional interest.  There was no phone number or any other instruction about how to dispute the finding.

I called my CPA.  It turns out there is a double-ultra secret practitioner phone number to the IRS.  We called it, and ended up with the same "sorry, too much volume" hang-up.

Then it occurred to me to contact my congressperson.  A real (and helpful) person in her office got back to me promptly and said he would contact the Taxpayer Advocate Office of the IRS on my behalf.  When I figured out what that was, I told him "thanks" but I could do it myself.  He told me it was already done and he'd get back to me with the answer.  

A few days later, the Taxpayer Advocate's response turned out to be: (a) I could submit evidence that I had sent the check (e.g. a certified or registered mail receipt), or (b) throw myself on the mercy of the IRS by filing the one-time in a lifetime request for waiver of a penalty for not having paid one's taxes.  I objected to (b) on the grounds that I had paid my taxes, and to (a), after a brief bit of research, on the grounds that (i) 26 U.S.C. §7502(a)(1) states that the date of postmark of something mailed to the IRS is the date of filing or payment, (ii) if the USPS or the IRS loses the envelope then there is no way to see the postmark, (iii) there is no requirement of mailing by certified or registered mail, (iv) in the normal course, the envelope should have been postmarked on the date I dropped it in the mailbox, and (v) there was evidence of mailing, i.e., my testimony that I had in fact mailed it.  That didn't get a rise out of the Taxpayer Advocate Office.

At this point, I was fed up and didn't want interest to keep piling up, so I paid the outstanding claim for penalty and interest with an electronic transfer.

But being, as I am, slightly obsessive about stuff like this, and a lawyer to boot,  I did some research. I quickly found several cases in which petitioners won against the IRS on the basis of their oral testimony that they had deposited the filing or the payment in the US mail.  (See Jones v. U.S., 226 F.2d 24, 28 (1955) ("We take judicial notice of the fact that the overwhelming majority of taxpayers who live elsewhere than in the centers where the offices of collectors are located make their returns and present their claims for refund, and the like, through the mails. Even great numbers of those living in the immediate neighborhood of a collector's office doubtless follow the same practice; and the procedure is encouraged by the collectors since it tends to conserve the time of those officials and their staffs. Reliance upon the mails as the medium through which such deliveries for filing are made may be said to be all but universal."; Wells v. C.I.R., 22 T.C.M. (CCH) 169 (1963); Walter M. Ferguson, Jr., 14 T.C. 846 (1950) ("The final issue has to do with the penalty determined for the alleged failure ... to file a return for 1945. The Commissioner makes and could make no sound argument in light of the evidence. It is unnecessary to decide whether there was a ‘filing.’ This would not be the first time that a collector had lost a return. Even if no return was filed, the failure was due to reasonable cause (failure of the mails) and not to willful neglect ..., so in no event would the penalty be proper.")

A miscarriage of justice and the law is on my side! Now I was prepared to do something I had never done in forty-three years of being a lawyer - file a lawsuit against someone on my own behalf. (The congressperson's office noted that, once I was litigating, House of Representative rules prohibited its further involvement.)

What I discovered is that filing a claim in the US Tax Court, particularly in the small cases division, is really easy.  You can do it in pro per even though I signed as the lawyer for my wife and me.  You can file electronically.  I checked off that I was filing in regard to a disputed notice of deficiency, put together a short but thorough statement.  The $60 filing fee seemed like a reasonable bet against my chances of winning this case.  On August 30,  I filed in the U.S. Tax Court, requesting trial in Boston, seeking reimbursement of the $311.82 penalty and the interest.  (I wasn't sure if the filing fee would be a taxable cost when I won, but I threw that in too.)

Let me note, at this point, that I understood I probably didn't have a good case on the interest.  It was set statutorily at five percent, and that seemed excessive to me versus what I would have earned on the money, but the government would have a reasonable position that I, and not it, had the use of the money for the couple months.  But I was prepared to go to the mat on the penalty.  Millions for defense but not a penny for tribute!

On October 4, I received an email notice that there was a new filing in my case.  I eagerly logged went into Dawson, the Tax Court case management system, expecting to see the government's groveling response.  What I found instead was a motion to dismiss my case for lack of jurisdiction in the U.S. Tax Court.  More quick research.  Well, it turns out I assumed (and we know what that stands for) that the August letter was a notice of deficiency for failure to pay the penalty and interest.  It was not.  Penalties are not deficiencies.  And the U.S. Tax Court has no jurisdiction over disputes about penalties.  I spoke to the lawyer for the IRS, agreed that he was right and that I would concur in the motion and a dismissal without prejudice, and vented to his sympathetic but powerless ear about the injustice of it all.

To be fair, even the Taxpayer Advocate Office within the IRS recognizes this particular unfairness, and have said so in a legislative recommendation recommending that the Tax Court be given jurisdiction over penalty disputes.

Nevertheless, where we stand now is this.  I recognize that I really only have a good case for recovering the $311.82 penalty.  There are courts with concurrent jurisdiction over this claim:  the US Court of Federal Claims and the US District Court for the District of Massachusetts.  The fee for filing a claim in either one of them is $402.  To use the electronic filing system in either one, I would need to become a member of the bar of that court (which I could do) at a cost of $238.  

I have thought about whether making the point is worth $640 and the burden of drafting and filing pleadings for a federal court, as well as burdening the dockets of already overburdened courts.  I decline to do that.  Rather, its value to me is as a story I can now use when telling others with relatively trivial claims that sometimes there's just no justice in the world, and the law can't do everything.

So I give up.